If you’re a startup entrepreneur, get prepared, because you’re on a long, hard roller-coaster of a ride that will hopefully lead you to success one day. But in the meantime, here are the top 5 startup mistakes that often derail that roller-coaster on the way to success.
#5 – Giving Away Equity Immediately
If you’re running your own startup you are likely cash-poor. As a result, you will do everything in your power to avoid paying for services or for people. While this mentality is necessary to succeed as a startup, it can also force you into making some very poor decisions. One of those decisions is to just give away equity, or ownership in the company, to anyone who will provide “free” work.
Be wary, what is worth nothing now, might be worth millions later. For instance, consider the story of Mr. Choe, the graffiti artist who was hired to paint murals at Facebook’s first office. He was offered a few thousand dollars or a tiny bit of stock (about .1%). That stock is now worth HUNDREDS of millions of dollars! Ironically, a potential $2,000 job made Mr. Choe into the richest artist in the country (if not the world).
Trust me when I say you will rue the day you gave away 5% of your company to your friend who agreed to do your website design but never worked more than a few hours on it. If you do decide to give away equity, the best way to protect yourself is to do a vesting schedule. What this means, is that the equity will be given away over the course of a few years (the timing is dependent on what the owner/workers agree to). By doing this, you can test the person out for a while and if they are not committed or working out for any reason, you can terminate the agreement and still keep most of the equity that was on the table.
#4 – Believing in the ‘If You Build It, They Will Come’ Mentality
You built an amazing product or website. Everything you’ve worked for is coming true. Now all you have to do is release it to the public and be the next Bill Gates, right? Wrong.
Most people believe that their company will spread like a wildfire, but that is rarely, very rarely, the case. You need to have a plan in place (which is covered more in #3) of how you will market, distribute, and sell your product. You have to hustle, you have to grind, you have to get down and dirty. Take Twitter for example, the poster child of how startups grow.
The founders were involved in another company, which was failing. They spun it out into Twttr, which eventually turned into what Twitter is today. If you think they just launched the company, and it took off on its own, think again. First the first 30 months or so, they struggled to grow and acquire users. Then they hit what’s called the tipping point or critical mass, and today they’re on the way to an IPO.
The point is, to grow, you have to work, and usually you have to fail first. Success does not come overnight and simply launching a stellar product will not make your company successful without hard work and durability.
#3 –Not Creating a Long-Term Plan/Budget
Planning for the future (i.e. at least creating a very basic business plan) and putting together a 3 year projected expenses and revenues spreadsheet is a great way to set your startup on track for success, yet very few people take the time to actually go through with it. We all know that your projected numbers won’t be accurate, but that’s not the point. The point is to not only show your potential investors that you’ve done your homework, but to also show yourself what numbers you have to hit in order to succeed.
There are also many intangible benefits from this exercise that most people don’t think of, the most significant of which is limiting the potential for co-founder conflict down the road. Did you know that 62% of all startups fail because of co-founder conflict? One way to prevent this from happening is to talk things out via a thorough business plan so all co-founders are on the same page as to where you want the company to go and how you intend to get there. Your parents were actually right, do your homework!
#2 – Hiring Anyone Willing to Work for You
Have you ever heard the phrase, ‘you are only as strong as your weakest link?’ Good, because this is the mentality you should have as you start to build your company. Going back to the Facebook analogy we used in mistake #5…do you think Facebook was the first social network to ever exist? Nope. The reason Facebook succeeded was because of the people who built the company, together. You need to surround yourself with the best possible employees and not just take the first clown who wants to join your team.
It’s a difficult thing to do at first, because you need the help so desperately, but bringing on one bad employee could tear apart an entire company before you know it. Be selective. Would you marry anyone who will have you? No. So don’t bring someone into your company and life without being positive they will be a great addition to the team.
#1 – Trying To Be Your Own Lawyer
Our parents told us we could be anything we wanted to be. Well that’s still true, but, if you didn’t go to law school, don’t try to be a lawyer. There are some terrible stories I could tell you about people not using lawyers. One $40M silicon valley acquisition was cancelled because the founder used LegalZoom and neglected to check a basic box when incorporating. This cost him not only the acquisition, but also he owed $400K in deferred taxes as a result, even though he was cash-poor. The point is, lawyers went to school for 3+ years beyond college and spent a lot of money to do so, trust me when I say they are necessary.
Would you put your entire retirement and your kids’ futures in jeopardy by drafting your own will or family trust? Doubtful. So don’t determine the fate of your company by being your own company’s lawyer. I know it can get expensive, but it costs a hell of a lot less to do things right the first time than to have to remedy the problem down the road. ABSOLUTELY make sure to use a lawyer when you incorporate or for any other significant occasions such as hiring an employee, raising money, etc. If you are not sure how to hire a lawyer, you can find a lawyer on LawKick’s platform. Trust me, you’ll be thankful later.
Hopefully now you are more aware of some of the top 5 startup mistakes made by others. If you can learn and avoid these common pitfalls of startup companies, you’re definitely taking at least one step in the direction toward success. Good luck in your journey and remember…Rome wasn’t built in a day. Be patient. Be confident. Be Resilient.